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Advisory Council on Government Assets – initial recommendations for Hydro One and Ontario Power Generation, and updates on the merger of the Independent Electricity System Operator and the Ontario Power Authority

On Friday, October 17, 2014, Ed Clark, Chair of the Ontario Government’s Advisory Council on Government Assets (“Council”), gave remarks at the C.D. Howe Institute on the Council’s initial recommendations for restructuring government-owned assets, including the Liquor Control Board of Ontario (“LCBO”), Hydro One and Ontario Power Generation (“OPG”).

The first part of this bulletin describes the mandate of the Council, summarizes the recommendations for both OPG and Hydro One, and outlines the Premier’s reaction to the initial recommendations of the Council. The second part of this bulletin provides a brief update on the merger of the Independent Electricity System Operator (“IESO”) and the Ontario Power Authority (“OPA”) which is scheduled to take effect on January 1, 2015.

The Council on Government Assets

The Council was established in April, 2014 to provide the Government of Ontario recommendations designed to maximize the value of certain Ontario Government owned assets, namely OPG, LCBO and Hydro One.

This policy review was to consider the following:

Improvements to customer service

Increasing operational efficiencies

Maximizing financial returns

The overall objective of the policy review is to ensure that the Province is getting the most value from these assets that provide significant revenue used to support infrastructure development, health care, education and other government services. The one restriction on the Council’s mandate was to assume continued government ownership of these assets. In terms of timing, the Council was to release its initial findings in the fall of 2014 and its final report in the Spring of 2015 to inform the provincial budget process.

Key members of the Council include: Ed Clark, Chair and former Chief Executive Officer of TD Bank Group, Frances Lankin, former United Way of Greater Toronto and NDP cabinet Minister and Janet Ecker, President of the Toronto Financial Services Alliance and former Minister of Finance. Other members include: David Denison, former Chief Executive Officer of the Canada Pension Plan Investment Board and Ellis Jacob, President and Chief Executive Officer of Cineplex Entertainment.

Consultation Process

The Council met over the course of the past several months with various stakeholder groups and the senior management of the LCBO, OPG and Hydro One. These were private meetings arranged directly by the Council. As the Council moves into phase two of its analysis, additional consultations with stakeholders will be conducted. This second phase begins immediately.

Recommendations of the Council on OGP and Hydro One

The following recommendations are taken directly from the remarks made by Ed Clark at the C. D. Howe Institute on Friday, October 17:

OPG:

OPG contains two separate businesses: nuclear, which is very complex and expensive and hydro- electric and thermal, which is more stable.

OPG needs to focus on the Darlington nuclear facility refurbishment and on improving its operations and lowering costs. OPG needs to ensure that the Darlington project comes in on time and on budget.

OPG should create an internal structure, as if nuclear and hydro-electric/thermal are two separate businesses “this could lead to two separate organizations—a nuclear company with a board that has predominantly large project management experience and a non- nuclear company”.

Restructure existing labour agreements and pension plans to lower costs and ensure that they are stable over time.

Hydro One:

Hydro One’s transmission and distribution businesses should be divided into two separate businesses.

Hydro One should continue to operate and manage the transmission business.

Hydro One Brampton could be used as a catalyst for the merger of a number of greater Toronto area (GTA) utilities; the merged entity could bring in private capital and the Ontario Government could sell down its interest.

Hydro One’s distribution assets should be used to facilitate but not force the consolidation of other municipally-owned electricity distribution companies (“LDCs”).

“the Council is recommending the separation of the transmission and distribution businesses currently within Hydro One Networks. We would then dilute the government’s interest in that resulting distribution business by bringing in private capital. We would retain a minority share. This new company would then have the capacity to undertake further consolidations…. We would expect other municipalities to respond by joining these entities or seek their own new partners—public or private.”

Maintain Hydro One Networks distribution whole—it will have the capacity to undertake other consolidations and it should not be broken up or merged with other LDCs unless there are clear benefits to ratepayers and the overall value of Hydro One Networks distribution is not materially impacted.

The Province will be sensitive to labour issues resulting from these changes but expects to find mutually acceptable solutions.

The Province would have unspecified control rights over future changes in ownership.

Distribution rates cannot go up as a result of any sale; savings from greater efficiencies and economies of scale to be passed on to distribution customers.

The Province of Ontario will realize less income from Hydro One and OPG but improvements being recommended will be greater than the lost income.

Next Steps for the Council and Government

The Council will consider the various barriers and disincentives to the consolidation of the distribution sector and make further recommendations to remove those barriers in its final report in the Spring of 2015.

The Government’s official reaction to the remarks by Mr. Clark were supportive and in line with the goals set for the Council. As stated by the Premier,

[I] have asked the Council to build on its work by entering phase two. As the Council members move forward, they will broaden their commitment to a collaborative and transparent process and deepen the relationships they have established with all parties….. I look forward to receiving a summary of the council’s initial findings in its interim report, and to releasing this report prior to our government’s Fall Economic Statement (press release October 17, 2014).

The Ontario Government intends to build the final Council recommendations into its budget process for the spring of 2015.

IESO and OPA Merger Update

On July 24, 2014, Bill 14, Building Opportunity andSecuring Our Future Act, 2014 (“Bill 14”) was passed by the Ontario legislature and received royal assent. Among other changes, Bill 14 amended the Electricity Act, 1998 to amalgamate the Independent Electricity System Operator (“IESO”) and the Ontario Power Authority (“OPA”), which will cease to exist as separate entities and will continue as the Independent Electricity System Operator (“New IESO”).

The Ontario Minister of Energy has stated that on January 1, 2015 the OPA and IESO will be “formally merged, to create a more efficient procurement and planning system operator”.

The legislation provides that the assets, contractual obligations and liabilities of the IESO and the OPA will all be automatically assumed by the New IESO as a result of the merger. Bill 14 provides for the separation of the New IESO’s market operations from its contract management and procurement activities. The details of how the separation of market operations and energy contract management will be implemented are still in process. The legislation also stipulates that there will be a new CEO and new board of directors for the New IESO—all of those appointments have not yet been announced.

A working group is addressing major implementation issues and further details are expected to be announced prior to January 1, 2015.